Financial intermediaries are financial institutions that accept money from savers and use these funds to make loans and other financial investments in their own names. Others include, saving institutions, insurance companies, pension funds, finance companies and mutual funds. Their role is to assist in the transfer of savings from savings surplus units to savings deficit units so that savings can be re-distributed into their most productive uses. These intermediaries come between ultimate borrowers and lenders by transforming direct claims into indirect claims. Financial intermediaries purchase direct (or primary) securities and, in turn, issue their own indirect (or secondary) securities to the public. For example, the direct security that a savings and loans association purchases is a mortgage, the indirect claim issued is a savings account or a deposit certificate.
The financial intermediaries performs many of the tasks that were initially perfumed by lenders and borrower- task of gathering funds, credit analysis, evaluation of risk, and handling of administrative and legal details. These takes involve real costs and the intermediary can perform them much more efficiently and much lower total cost than it can be done by an individual lender and borrower. In the jargon of an economist, financial intermediaries exhibit “economies of scale” with respect to costs of search, acquisition, analysis and diversification
By their actions, financial intermediaries provide a higher return to lenders for a given degree of risk and lower costs of borrowing than would be possible with direct finance. Higher savings rate encourage savings and lower borrowing costs permit greater investments. Savings and investments are equated more rapidly thus there is a faster economic growth.
Wilfykil answered the question on March 8, 2019 at 12:17
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